What happens when prices go into freefall

Video Transcription:

Hey guys. Had a great question here from Simone. So Simone basically said, "So what happens when prices go into free fall?" Which is pretty straight and direct and look, to be fair, they do. They do, at a certain time in the market, what we find, and I call it falling off the edge of a cliff. And it's not all prices, but certainly there are areas that will fall and some will fall more than others and yeah, absolutely. That's when we know that recession's hit or when whatever, something's gone wrong, the wheels have fallen off, which does happen. Generally it happens about every seven to 10 years. We're overdue one now. I'm predicting mid 2021, when I think we'll probably hit it only because Trump will keep doing whatever he needs to do to stay in power until November next year. And then he'll probably have another six months grace before the things fall off.

So, that's my theory. Anyway, that's not the question. The question is, so what do you do? So let me put it to you. There's three different aspects. So, should you sell your property? If you own existing property, should you be selling it? Well, the answer is no. And the reason I say no, and there's a qualifier on that, there may be circumstances, which is if you can't afford to hold it and remember, generally it'll be the value that's affected, not the rent. So you should still be able to hold it. If you couldn't afford to hold it before this happened, you should have been doing things before this hit. So bottom line is no, you shouldn't sell it. You should hold on.

Because oftentimes, if you've bought in the area of good fundamentals, a good area, that sort of thing, then actually you might find that the prices drop, but they come back up relatively quickly. And look, two years, six months to two years, depending on where you're at, is a good amount of time. So yes, you're going to be sitting there for two years, holding that property. But you know what? Property investment is a longterm thing. If you're doing it short term, then it's a totally different strategy. Most people aren't doing it short term and they're not set up for those strategies. Because it's expensive to get in and out, in that way.

So, should you sell? No, you shouldn't really sell. Now if you have to sell, then yes, the problem with selling in that type of market is the market's going down. People aren't going to look at what it is now today. They're going to look at what it is in three months, six months, 12 months, and try and predict it. So even though I might say it's worth this much, you might find that you get 20%, 10% less because it's a fire sale. Because everyone who has to sell is putting them on the market and that is the worst market to be selling in. So, if you're in that situation, you feel that you are on a load and you can't afford to hold these things, get rid of them well before. I'm telling you, I think 18 before this happens, so you should be doing something now, whether it be paying down your debt, remortgaging to achieve a debt, selling off, even though it might not be the best market right now. You should be doing something.

So the other side is, so that's if you've owned the properties. Now, the other thing is if you're in a really crappy area, I hate to say, but when you're in a crappy area, you should be selling before it becomes a crappy area. Also, you shouldn't really be buying into a crappy area. Now, some people and a lot of people are buying in a crappy areas because they offer high yields. So then the question is, okay, crappy area, high yields, the yields aren't going to be affected that much by prices dropped. It's only the price, and you're not going to be forced to sell the property because the price drops. That's one of the key things. Banks don't repossess properties in the UK. They do in other countries. They won't do it in Australia. They will do it in Singapore and various countries around the place. And if you're in the US, then generally you have a non-recourse loan, so you can actually hand it back to the bank. But any equity you've got disappears. So there's different countries have different ways of treating it.

But let's talk about the UK just for a sec. So, if you're in a crappy area, don't buy there in the first place. If you bought in a crappy area because of the high yield, then you're probably going to keep getting the high yield, in which case hold it. Hold onto it for longer. But you might find that in crappy areas, they take longer to come out. I mean, there's properties that I know in the UK now where literally since the last recession, they still haven't recovered, and we're talking 12 years later. And that's because there's no fundamentals, there's no investment, there's no employment, there's no shops, schools, transport links, all that [inaudible 00:04:50] crap. It's in a continuous degradation.

And my point is this, if it's unlikely to get money coming in, then you should be getting out. Because the fundamentals will just slowly degrade over time. And that is what props up the value. That's what holds up the value and makes it property valuable. So, get rid of it. The other side, if you're on an off plan property, in other words you bought now and now the price has gone down. So there's a couple of things that, and look, that's a shitty situation. No doubt about it. So what you've got to look at is you exchange on the property. If you have an exchange, that's fine, you can back out and you shouldn't have lost too much money. You might have lost some fees and charges and things like that. But it's probably better to do that and back out. But if you've exchanged, you are legally bound to complete that property at the price that was set.

Now, there's a couple of things. Because the price has dropped, the mortgage that is available to drop, so you've got to work out how much extra money you've got to put in. And if you're going to put in more than you can afford, well, then that's a problem. So then you've got to look at what you can do, and what I would recommend you do, is you start speaking to the developer and you start making sure that they know and you try and get it on with a local agent who can actually sell it off for best price possible, and try and get out of that contract any way possible. Now, it depends on what the contract terms are and that sort of thing.

In some cases you may put a 10% deposit in and you lose the 10% deposit. I tend to stay away from these properties that have 30, 40, 50% deposits because you can lose all that deposit. And for me it's just not, it's just too much of a risk. So, generally 10 and there might be another five, 15%, is generally what we'll sort of look at maximum. That's a lot more conservative way of doing it, because otherwise you're just funding the developer to build it themselves. They're not really putting much money in. But anyway, that's neither here nor there. So if that happens, you've got to find a way either out of it or find a way to find the cash. Now if it's in a really good area and you've got good fundamentals, sometimes it may be worth still buying it because you may find the price drops and then it comes back up.

London was certainly like that. And when you talk about central London, the best fundamentals on the planet, arguably, very arguably, but yeah, you know, that actually... We sort of had probably six months where it was under and then it was back up again. So if you had sold on the way down, rather than held for six months, where you would've still made money. Best fundamentals. And this is why I keep coming back to fundamentals. So that's the other side.

The final bit is if you haven't actually bought a property and looking to buy, well then what you need to do is negotiate ridiculous offer. In other words, this is the price they're saying, look at it going down and try and pick what it's going to go down to. And then negotiate down to that. And you can get in for some really... Because obviously developers, they have to sell these properties and normally their funding will have been struggling now and they're struggling to sell. So they're trying to get rid of these. So you can pick up some absolute bargains. I mean, some of the stuff we picked up, I mean, I know a £ 210,000 property, we picked up for 65,000, and now that property is back up to about 160,000, so there's some good money to be made in these things if you do it right.

But the biggest thing, and forgetting all else, is control your emotions. Control your emotions. Because actually if you can see the numbers and you can disperse with the emotions and get rid of the negative news and the whoa, the sky's falling down, and just look at it for what it is, and then plus 10% worse on it, you're probably going to be about right. And you'll probably come out of it feeling pretty good about yourself because you will have got a good deal.

All right guys, hopefully that answers the question about what to do when prices fall off the thing, but thanks Simone for the question and I'll chat real soon. Remember, subscribe, questions down at the bottom, anything you don't believe, or, you know, comment and I'll be happy to have a discussion with you about it. All right guy, see you later, have a great day. Bye.

Brett Alegre-Wood
December 11, 2019

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